WASHINGTON - The U.S. Supreme Court ordered a lower court to dismiss a legal challenge by three Indiana pension funds to the government-backed sale of bankrupt automaker Chrysler LLC to a group led by Italian carmaker Fiat SpA.

The sale closed on June 10, a day after the Supreme Court rejected an emergency request from the pension funds to put the deal on hold while they challenged it as an unlawful reorganization plan.

The legal issue at the heart of the case involved the power of a bankruptcy court to allow a failing company to quickly sell its assets without going through a reorganization process that protects creditors.

The case involves a section of the bankruptcy law allowing a quick sale. Chrysler filed for bankruptcy protection on April 30 to complete the sale and alliance with Fiat within 60 days. A federal bankruptcy judge and a U.S. appeals court in New York both upheld the deal.

In a brief order, the Supreme Court granted an appeal by the pension funds, set aside the appeals court ruling, and sent the case back to the appeals court with instructions to dismiss it as moot.

Attorneys for the pension funds said in the appeal to the Supreme Court, The sale of Chrysler's assets has closed and the distribution of value to its creditors has occurred, but the issue of the transaction's legality is not dead.

On its face, this deal smacks of the sort of insider favoritism that the bankruptcy code was designed to prevent, they said, adding that the transaction was nothing more than a way for the government to pick winners and losers from among Chrysler's claimants.

Chrysler and the Obama administration urged the Supreme Court not to hear the case.

The U.S. Treasury Department directed and funded a restructuring of the No. 3 U.S. automaker in bankruptcy that gave operational control of the company , and an initial 20 percent stake, to Fiat. The U.S. government now holds an 8 percent stake in Chrysler, while a health care trust affiliated with the United Auto Workers union holds 55 percent.

Chrysler's attorneys said the deal involved the sale of substantially all of Chrysler's assets for $2 billion, yielding significantly more than the only other available alternative -- the automaker's immediate liquidation for less than $800 million.

Solicitor General Elena Kagan of the U.S. Justice Department said that under the bankruptcy law, a consummated sale to a good-faith purchaser cannot be later reversed or modified by a reviewing court.

The challenge to Chrysler's sale lacks merit and would not warrant review by the Supreme Court even if the case still involved a live dispute, Kagan said. (Reporting by James Vicini; Editing by John Wallace)